'06 Quake Would Cost $80B Insured Losses

A current version of the 1906 San Francisco earthquake and fire would result in at least $260 billion of damages of which up to $80 billion would be covered by property and workers' compensation insurers, a modeling firm estimated.

Newark, Calif.-based Risk Management Solutions based the figures on a study of the current population and exposures of the San Francisco Bay area that updates its 1995 projection for a San Francisco earthquake.

In contrast to the 1906 event, where 80 percent of the losses were caused by fire, less than 15 percent of the estimated total insured property losses are expected to be fire-related in 2006.

The property and workers' compensation losses estimated in the RMS report include residential and commercial property and contents losses, as well as direct business interruption and additional living expenses due to ground shaking.

In the RMS scenario, strong ground shaking would affect 19 Bay Area counties, with an estimated building inventory value of approximately $2 trillion for residential, commercial and industrial properties.

The insured loss estimate accounts for the effects of 'loss amplification'--the range of processes, including economic demand surge for supplies and labor, that raise the total costs paid out by insurers in the aftermath of the largest catastrophes.

The analysis also includes the impacts and expected costs of fires starting and spreading within those areas with the highest levels of predicted damage.

"The insured loss estimate for this event is four times greater than the 1994 Northridge Earthquake, the worst insured loss experienced to date in California," said Dr. Patricia Grossi, earthquake model manager at RMS.

The new report also demonstrates the features that the 1906 San Francisco Earthquake and Fire had in common with Hurricane Katrina and the Great New Orleans Flood.

Both were urban disasters affecting major coastal port cities with populations of around 450,000, with secondary consequences causing three-to-four times as much damage as the original event, the study notes.

And in both cases, the magnitude of the damage led to large-scale evacuation and significant depopulation in the weeks following the disaster. While the reconstruction of New Orleans has scarcely begun, the 1906 earthquake was followed by pressure to expand the terms of insurance payments and rampant demand surge during the rebuilding, the study noted.